So What’s With the Price of Oil?

So what’s with the price of oil? To get some insight into
oil, try this exercise. Go out to your driveway and find the biggest oil spot
you can. Drill a hole into the concrete. Now suck the oil out. That’s pretty
much the problem in getting oil out of the ground. It’s trapped in tiny pores
in the rocks, and thousands of feet below the surface the pores are squeezed
shut so the rocks are about as porous as concrete.

Drill More Wells?

Nobody believes we are running out of oil any time soon. What we are
doing is bumping the ceiling where our demand for it equals our ability to get
it out of the ground. When that happens the price will be bid up and up as
buyers compete for it. So why not drill a lot more wells? First, the stuff only
flows through the rocks just so fast and no amount of drilling wells will speed
the flow up. But there’s a far more important reason. Oil flows through the
rocks at all, and up the wells to the surface, because it’s under pressure.
Get greedy, try to extract it too fast, and you bleed off the pressure. Not only
do you then have to pump, but the flow in the rocks slows down. We ruined a few
early oil fields learning that lesson. Once the oil no longer flows easily, it
has to be extracted by secondary means like pumping water or steam into the
rocks to push the oil out. That’s expensive and inefficient compared to doing
it right in the first place. So if we simply start pumping oil like crazy, that
may relieve a temporary oil shortfall, but we will end up leaving a lot more oil
in the ground in the long run, and paying a lot more for what we do extract.

Find More Oil?

So let’s go find more oil. Well, consider a few statistics. Eight
supergiant fields, with 20 billion or more barrels, account for a sixth of the
world’s oil reserves. 22 more big fields bring the total up to a third, and
another hundred or so fields with 2 billion or more barrels bring the total up
to half. Altogether there are about 500 oil fields with half a billion or more
barrels and they account for two thirds of the world’s oil. 94 per cent of all
discovered oil is in the 1,300 biggest fields. The remainder is in about 40,000
small fields. We can discover oil in dribs and drabs forever without making a
dent in the world’s energy picture. The oil is in the giant fields. And guess
what? They’re called “giant” because they’re big, and we’re running
out of places on earth capable of hiding anything that big. How many places in
your yard could hide a moose? The discovery rate of giant fields has been
dropping for more than fifty years.

In 1956, geologist M. King Hubbert realized he could apply the statistics
of oil fields to entire regions or even the world. In an oil field, production
typically follows a bell-shaped curve, and production lags discovery by about
ten years. Hubbert applied these principles to the U.S., assuming our total oil
production would be 200 billion barrels. He predicted U.S. crude oil production
would peak between 1966 and 1971. It peaked in 1970. In the 44 years since
Hubbert published his predictions, we have followed his curve almost exactly.
Our production now is about half of its peak value, and about what we were
producing in 1950.

As for the rest of the world, global oil discovery peaked in the early
1960’s, even though the record expenditures for exploration came in the
1980’s. Ninety per cent of all production is from fields older than 20 years.
Global oil discoveries in the 1990’s were about equal to what they were in the
1940’s, and discoveries in the Middle East account for only a small fraction
of that. We are using oil at a rate about four times as fast as we are
discovering it. So what about unexplored areas? Oil geologists have a pretty
good idea why oil occurs where it does, and wildcatters make their money
drilling where bigger producers won’t take the risk. The reason nobody is
drilling the polar ice caps or the deep ocean floors is that there is every
reason to believe it won’t pay off.

What about more exotic ideas? What about oil shale and tar sands? In
1997, Canada’s oil production from tar sand – for the year – was enough to
supply global demand for 27 hours. There was a theory a few years ago that there
were huge supplies of natural gas deep in the earth’s crust. The test well to
test the theory yielded nothing. You can’t fill your tank on exotic theories
and what ifs.

What to Do?

So what should we do about high energy prices? In my view, nothing. If
there was ever a time to let Adam Smith economics do its thing, this is it. But
what about the economic hardships? Well, if you’re a single mother working
minimum wage, high oil prices are a hardship. We have mechanisms to help people
in such situations and we should use them. But get real. Most of what we have
called “hardship” so far has been mere inconvenience. When Reebok and Tommy
Hilfiger and Perrier and Starbucks go out of business because nobody is buying
their products, then we might begin to talk of hardship. As for the folks who
bought SUV’s recently, hey, that’s what natural selection is all about.
(Actually, SUV's get a bum rap - their gas consumption is really not all that
bad and one recent study concluded that a hybrid car had a bigger environmental
footprint over its lifetime than a Hummer, mostly because of the nickel in the
hybrid's batteries plus the longer lifetime of the Hummer.)

Still having doubts? Consider these quotes from Energy Sources --
The Wealth of the World, by Eugene Ayres and Charles A Scarlott:

From
the discussions in the earlier chapters of this book it is clear that the
problem of energy for the United States is not one of the dim future. It is upon
us now. …Our imports of petroleum are small but each year they become larger.
By 1960 they are likely to be quite substantial. By 1970 they will almost
certainly be huge -- if foreign oil is still
available then in sufficient quantity. ... This tiny period
of earth's life, when we are consuming its stored riches, is nearly over ...
Fortunately for us there is still time for fundamental research. But not too
much time.

That
was written in 1952. There it is, all laid out with perfect precision fifty
years ago. Don’t let anyone try to tell you it was unforeseen or that nobody
issued a warning. It’s about as classic an exercise in elementary logic as you
can ask for: there is a finite amount of oil in the ground, we are using it and
not replacing it, therefore we will eventually run out of it.

No
Sympathy for California

Following the collapse of Enron, the myth has
arisen that California's energy crisis of 2002 was entirely the result of market
manipulation by energy companies. Certainly market manipulation exacerbated the
situation. But there wouldn't have been a situation to exacerbate if California
had enough generating capacity on hand. And that problem had nothing to do with
Enron. It had everything to do with the NIMBY Syndrome - Not In My Back Yard.
Basically obstructionists can tie up the siting of power plants for years.

So I propose a simple rule: If you want the fruits
of technology, you agree to live next door to the production facility. And the
waste disposal facility.

At the very least, California could abolish laws
that mandate energy waste. California has hundreds of neighborhoods
governed by homeowners' associations, and many of these prohibit outdoor
clotheslines. So while the price of electricity in California was skyrocketing -
in the summer when it's hot and dry - many Californians were required
to dry their clothes electrically.

Wisconsin is no better. We've had residents
complain about nearby energy plants. Not messy coal-fired plants. Not risky
nuclear plants with long-term waste disposal concerns. Windmills. Yup,
they actually complain about the noise.

Property Rights 101 for Dummies (and NIMBY's)

Your property rights end at your property line.

Your house is a box to keep stuff in and keep
the rain off, not a financial instrument.

Investments can lose value as well as gain. If
you're dumb enough to use your house as an investment, don't complain if the
price goes down.

If you want a growth investment, buy stocks.

Everything You Need to Know About the Energy Crisis

A monster motor home, towing a double-deck trailer
with an SUV and a boat, a massively overpowered boat at that. (Nice irony: check
out the logo on the back of the RV!) This RV is small.
I was overtaken by one that was literally the size of a Greyhound bus. In fact
that's what I thought it was in my rear view mirror until it passed me.

Does this make economic sense? Here's a 2004 ad
from a Green Bay paper:

1990 RV $130,000 new ..... will take $44,000.

This means that over 14 years, this person is
taking an $86,000 loss. That's just principal, not interest, maintenance,
insurance, or fuel. That amount of money would pay for 860 nights in a $100
hotel room. That's 61 days a year. I seriously doubt the person who placed the
ad, or the guy driving the rig above, gets 61 days' vacation a year. For a
retiree who decides to spend a few years traveling, a motor home may make
economic sense. I just hope he doesn't expect the rest of us to make up that
$86,000 when he needs extended medical care. But for a guy with a few weeks
vacation a year, it would cost a lot less to fly, rent a car, boat and cabin,
than it would to haul it all with him.